Facebook and Microsoft Had Great Earnings, but Can They Keep the Market Running?

While key stocks in this market, they may not be effective leaders.

Microsoft (MSFT) and Facebook (FB) put up very strong earnings reports Wednesday night and are trading sharply higher, but the big question is whether they can lead the broader market higher.

The Nasdaq 100 ETF (QQQ) is trading up about 0.7% in the very early going on Thursday, but the Dow Jones Industrial Average and the Russell 2000 ETF (IWM) are indicated lower. China markets fell 2.4% overnight on concerns about a reduction in PBOC-supplied liquidity, and overseas markets are mixed.

The strong earnings news from several key stocks has the bulls feeling quite celebratory, but the fact that the indices are already quite extended presents a dilemma for market players. Both Microsoft and Facebook reports are very strong and indicate that the stocks can support higher valuations, but they are not offering attractive entry points right now.

Facebook, in particular, looks relatively cheap with year-over-year revenue growth of 26% and a trailing P/E of 24x, but the stock has moved from $123 in December to nearly $200 this morning. That may not be an excessive valuation, but chasing the gap this morning is not easy -- even if you do believe that the stock is still not overvalued.

There are already several valuation upgrades of Facebook on the wires, with targets of $215, $230, $240, etc., which makes buying a bit more logical but doesn't help create easy entry points.

A secondary question Thursday morning is whether these good reports are going to help the broader market to keep running. In the early going, the answer appears to be "no." There is some mixed action in other names like Netgear (NTGR) and Xilinx (XLNX) and the weakness in small-caps is a concern.

Amazon (AMZN) will be the big earnings report on Thursday evening and can help to keep the upbeat response to earnings going, but the issue is whether these names are going to be leadership for the broad market or whether they are simply company-specific events that will lead to narrower leadership.

This is looking like a narrow rally with a few big-cap names leading. It keeps the trend positive, but entry points are tough and many smaller stocks are struggling. A poor report from 3M (MMM) just hit and that is putting further pressure on the DJIA. Facebook and Microsoft are key stocks in this market, but they may not be effective leaders.

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At the time of publication, Rev Shark had no positions in any of the securities mentioned.

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